Published on: 2026-02-27
“Why Is the US Dollar Getting Weaker?” has become a key macro theme because it reflects how investors are pricing US growth, interest rates, and policy risk. The dollar rarely falls on one headline. It typically weakens when markets expect a softer US economy and a less restrictive Federal Reserve, while uncertainty encourages global capital to diversify rather than concentrate in USD assets.
At the same time, recent US tariff measures have added trade-policy uncertainty, which can dent confidence and reinforce a weaker US dollar outlook through both the interest-rate and risk-sentiment channels.
Markets are pricing a more dovish US outlook: Expectations are shifting toward easier Federal Reserve policy as inflation pressure cools and growth momentum slows, reducing the dollar’s yield advantage.
US data are reinforcing the slowdown narrative: Softer activity and a less-tight labor market are making the dollar more sensitive to negative surprises and weakening the support for “US outperformance.”
Policy uncertainty is adding an extra drag: New tariff measures and broader trade-friction risks are increasing uncertainty around costs and growth, which is keeping pressure on the dollar and supporting a lower-rate narrative.
A key reason the US dollar has weakened is that the return advantage from holding USD assets has narrowed. When the Fed is hiking, the dollar often trades like a high-yield currency. When markets believe the hiking cycle is over, that structural support fades.
At the January 28, 2026, FOMC meeting, the Fed kept rates at 3.5% to 3.75%, but two members favored an immediate quarter-point cut. Even if policy does not change quickly, the shift in the internal debate matters because FX markets trade expectations more than statements.
For traders, the clearest confirmation is the short end of the Treasury curve. If news or data pushes 2-year yields lower, it usually signals a more accommodative Fed path and tends to be negative for the US dollar.
A strong-dollar regime is easier to sustain when inflation keeps the Fed on a restrictive policy stance. As inflation cools, markets become more willing to price rate cuts, and the dollar’s yield advantage shrinks.
CPI rose 2.4% year over year in January 2026. That does not mean inflation is “solved,” but it does mean the pressure to keep policy tight is less one-sided than it was earlier in the cycle. In FX terms, the balance of risks has rotated away from “higher for longer at any cost” toward “how much slowing can the economy absorb.”
Currencies usually strengthen when growth surprises on the upside. The US dollar benefited from clear US outperformance, but that support has weakened as momentum cooled.
Real GDP rose at a 1.4% annual rate in Q4 2025, down from 4.4% in Q3. That slowdown changes how investors price US assets and reduces the “US growth premium” in FX. It does not automatically signal recession, but it encourages diversification when other regions are stabilizing.
Jobs data matter because they shape the Fed’s confidence. In January, the unemployment rate was 4.3 percent and payrolls increased by 130,000. That combination points to an economy that is still expanding but cooling. For the dollar, “cooling” is not bullish unless inflation is re-accelerating.
In practice, this environment increases the US dollar’s sensitivity to negative economic surprises. When markets are already anticipating policy easing, weaker-than-expected data can prompt significant currency movements.
Tariffs can push the dollar in two directions. They can raise import costs, which can lift inflation risk. They can also hit growth and confidence, which can push yields down and weaken the USD. In the current setup, markets are focusing more on uncertainty and growth risk than on a clean inflation impulse.
A new temporary import surcharge raises costs for some imported goods and adds uncertainty to the trade outlook. In currency markets, the main issue is not the legal basis but the knock-on effects on business decisions. When companies cannot confidently predict landed costs, they often delay orders, adjust supply chains, and cut back on risk-taking. That can weaken growth expectations and pull short-term yields lower, which typically puts pressure on the US dollar.
A separate executive order extends limits on duty-free de minimis shipments and applies the import surcharge rate to certain postal packages. This adds extra steps and cost for small cross-border deliveries, keeps tariff rules in focus, and can lift market volatility. When volatility rises and rate-cut expectations grow, USD carry trades tend to look less attractive.
Another executive order terminates certain IEEPA-based additional ad valorem duties associated with previous executive actions. Rapid adjustments to tariff instruments may be interpreted by markets as indicative of unstable policy settings. Such instability can undermine confidence in near-term economic growth, even if long-term trade objectives remain unchanged.
Trading USD news works best when it is treated as a process, not a prediction contest. The objective is to identify which channel the market is using to price the headline: rates, growth, or risk sentiment. In early 2026, rates are the dominant channel, and tariff news often matters because it changes growth expectations.
Most scheduled releases are already priced in. What moves FX is the gap between the outcome and what markets expected, plus whether positioning is crowded. A “good” number can still weaken the USD if it fails to beat expectations or if it confirms a cooling trend.
Practical approach
Decide the baseline: is the market leaning dovish or hawkish before the data?
Define the invalidation: what outcome would force a reprice of Fed expectations?
Reduce size around releases, because spreads widen and prices can gap.
When the USD is weakening because markets expect easier policy, the fastest real-time confirmation is the short end of the curve. If the 2-year yield drops after a release, USD weakness is more likely to persist. If the 2-year yield rises and holds, the market is rejecting the dovish interpretation.
| Event type | What actually moves USD | USD tends to weaken when… | Best confirmation |
|---|---|---|---|
| CPI and inflation prints | Inflation momentum and services pressure | Inflation cools and front-end yields fall | 2-year yield down, USD breaks lower |
| Jobs report | Unemployment rate, wage trend, hiring breadth | Unemployment rises or hiring slows enough to shift Fed pricing | 2-year yield down, risk assets steady |
| FOMC decision and guidance | Language on risks, balance of risks, votes | Fed sounds more willing to ease or dissents skew dovish | Rates reprice lower, curve bull-steepens |
| Tariff headlines | Growth confidence and policy clarity | Uncertainty rises and markets price slower growth | Front-end yields soften, defensive FX outperforms |
When US interest rates are the primary driver, the most effective expressions are typically the most liquid US dollar currency pairs. If tariffs serve as the catalyst, markets may alternate between risk-off and rate-cut pricing. Therefore, confirmation of the prevailing narrative is essential.
Common positioning logic in a weak-USD regime
Look for pairs where the counterpart currency has stable policy support or improving growth signals.
Avoid trades where both sides face the same easing cycle, since the rate differential may not move.
Treat commodities and gold as secondary expressions, as they have their own supply-and-demand dynamics.
The dollar often weakens when investors expect lower US interest rates, softer US growth, or improved global risk appetite. Current conditions include slower GDP growth and cooler inflation, which reduce pressure for restrictive Fed policy and can narrow the dollar’s yield advantage.
Higher expected US rates usually support the USD by boosting returns on dollar assets. When rate expectations fall, capital often shifts to other currencies. With the Fed holding rates and some officials favoring a cut, markets see policy leaning less restrictive.
A weaker US dollar can benefit US exporters and increase the dollar value of overseas earnings for US companies. However, it may also raise import costs and complicate inflation management. The overall impact depends on whether the dollar’s decline is driven by healthy growth or by economic slowdown.
Tariffs can lift inflation by raising import costs, but they can also hit growth by increasing uncertainty and squeezing demand. The temporary import surcharge, starting February 24, 2026, adds trade-policy risk, which could weigh on the USD if markets shift toward slower growth and earlier Fed easing.
The US dollar can rebound, but lasting gains usually need stronger US growth or renewed inflation that pushes rate expectations higher. Without a clear shift in policy or data, USD rallies often fade as traders sell into strength.
The weakening of the US Dollar mainly stems from shifting expectations. As inflation cools and growth slows, markets lean toward a less restrictive Fed, which reduces the dollar’s support from interest-rate advantage. Added trade and tariff uncertainty also encourages investors to diversify away from USD, keeping the tone softer.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
Federal Reserve, Bureau of Labor Statistics, US Department of Treasury, BEA
